1 An inventor has been offered 12000 annually for the next f

1. An inventor has been offered $12,000 annually for the next five years and $6,000 annually for the following seven years for the exclusive rights to his invention. The price that he could afford to sell his rights now to earn 10 percent per year is closest to:

2. A company was incorporated with a capital value of $50,000; at the end of ten years, the capital had increased in value to $90,000. The equivalent annual compound interest rate for the increase in the capital\'s value is closest to:

Solution

Rreq1. Year Cash flows PVF @ 10% Present value 1 12000 0.90909 10909.1 2 12000 0.82645 9917.36 3 12000 0.75131 9015.78 4 12000 0.68301 8196.16 5 12000 0.62092 7451.06 6 6000 0.56447 3386.84 7 6000 0.51316 3078.95 8 6000 0.46651 2799.04 9 6000 0.4241 2544.59 10 6000 0.38554 2313.26 11 6000 0.35049 2102.96 12 6000 0.31863 1911.78 Present value of Cash flows 63627 The price to be paid for rights is $ 63627 today. Req 2: Value at the end of 10 years 90,000 Present value of Amount 50000 PVF at 6% for Yr-10 0.5584 Present value of amount of $90000 50256 Hence, rate of interest compounded is 6%